Levesque, Terrence JAuthor InformationView Profile; McDougall, Gordon H GAuthor InformationView Profile. Revue Canadienne des Sciences de l'Administration; Montreal Vol. 13, Iss. 3, (Sep 1996): 264-276.
In an era of mature markets and intense competitive pressures, many firms are focusing their efforts on maintaining a loyal customer base. Loyal customers often cost less to service, spend more as their time with the firm lengthens, and provide a good source for new business. Customer dissatisfaction diminishes the base, forces the firm to rely on a more volatile customer mix, and erodes the firm's reputation. This is particularly true in service industries, where customer dissatisfaction is a significant problem (Best & Andreasen, 1976; Fornell, 1992; Singh, 1990) and improved customer loyalty has a substantial impact on profits (Reichheld & Sasser, 1990). For many firms, successfully managing customer dissatisfaction is crucial to their stability and profitable growth and requires a strategy that is far more comprehensive than simple complaint handling.
Emphasizing complaints alone is inadequate. The distinction between complainers and noncomplainers oversimplifies the customer reaction to dissatisfying experiences. Dissatisfaction, according to Hirschman (1970), provokes two active negative responses, voice and exit, which present different opportunities and threats to profits.
Hirschman contends that some customers react to dissatisfaction passively, preferring to remain with the firm. These "loyal" dissatisfied customers choose to remain in the belief that the likelihood of an improvement outweighs the benefit of searching for another supplier. While their choice does not immediately threaten profits, loyal customers' continued dissatisfaction may lead them to voice or exit. Another dissatisfaction response is negative word of mouth (Richins, 1983). Singh (1988) finds that negative word of mouth is only associated with exit. Here, it is not treated as a distinct behaviour in the discussion of dissatisfaction responses.
When customers voice, they give the firm a chance to rectify the problem, and interestingly, if the firm recovers successfully, to increase loyalty and profits (Fornell, 1992). Exit, for any reason, reduces the firm's profits. If customers leave from frustration with the product or service quality, they often compound the loss by persuading others to follow them. If exit and voice are driven by different problem types or customer characteristics, losing exit information means that the firm has an incomplete and possibly distorted view of dissatisfaction. Lacking accurate information, managers cannot determine which problems create the most serious threat to profitability; that is, which problems are more likely to prompt exit, and which voice.
Much of the previous research in understanding consumers' responses to problems has focused on individual determinants (such as attitudes toward complaining). Studies of episode-specific factors have examined the effects of product class, attribution of blame, perceived costs of complaining and the expectations of a successful complaint, as well as respondents' personal characteristics (see Richins, 1987, and Singh & Howell, 1985, for reviews). More recently, Singh (1990, 1991) has examined the role of market structure as a determinant of dissatisfaction responses.
In contrast, this study examines determinants that are rooted in the nature of the problem experienced (i.e., service quality, pricing, and location). The research considers the connection between problem types and customer choices among exit, voice, and loyalty in a service industry. It uses a hypothetical choice problem requiring respondents to state how they would react to a variety of problem combinations. The results provide insights into the relative importance of different problems to customer defection rates.
Theoretical Background
As initially proposed by Hirschman (1970), when customers face a problem, they may respond by exiting (switching to a new supplier), voicing (attempting to remedy the problem by complaining), or loyalty (staying with the supplier anticipating that things will get better). Extensive research has examined the nature and causes of consumer complaint behaviour (CCB), including the empirical significance of exit and voice (Best & Andreasen, 1976), the correlates of exit and voice (Richins, 1987), and customer response categories based on their choice of voicing (Singh, 1988). To date, no empirical work appears to have examined the connection between problem types and exit and voice responses.
This study investigates the connections between types of problems (i.e., performance lapses) and aggregate rates of exit, voice, and loyalty (Figure 1). According to Hirschman (1970), in response to a performance lapse, a fraction (lI--a) of a supplier's customers take no action, and a fraction a either exit immediately or voice. Of those who take action, a fraction cp switches immediately and a fraction (1--p) complain. Of those who complain about a problem, a fraction y will switch if the problem that they complained about is not solved, and a fraction (1y) will stay with the supplier. These connections are illustrated in the tree diagram shown in Figure 1.
The primary reasons why consumers select a particular product or service-relative price, location, and quality-are also the principal causes of dissatisfaction (Anderson, Cox, & Fulcher, 1972; Best & Andreasen, 1976; TARP, 1986). In particular, when customers deal with service firms, the two main reasons for CCB encompasses problems related to service quality: either a failure to deliver the service or a problem with how the service was delivered (Bitner, Booms, & Tetreault, 1990). These two problems, referred to as outcome (the contractual aspects of the service) and process (the customeremployee relationship aspects of the service), have been identified as distinct and separate constructs (Babakus & Boiler, 1992; Carman, 1990; Cronin & Taylor, 1992; Morgan & Piercy, 1992; Parasuraman, Berry, & Zeithaml, 1991). Outcome involves the performance aspects (contractual) of the service and is a consequence of the skills and know-how of the employees (i.e., professional competence), the ability of the organization and its employees to keep their promises, and to solve problems when they arise (Gronroos, 1984; Morgan & Piercy, 1992). It is based in part on consistency-doing what you say you are going to do and doing it every time (Schmalensee, Bernhardt, & Gust, 1985). It is the reliability of the service, and reflects aspects of the service such as accuracy and timeliness. Process is based on customer-employee relationships. It involves the functional or people aspects of the service and is a consequence of the behaviour and customer-oriented, servicemindedness of the employees (Gronroos, 1984). It reflects the tone of the relationship and incorporates empathy and assurance.
This research builds on two ideas concerning customer complaint behaviour to investigate the rates of exit, voice, and loyalty associated with the four types of problem (i.e., price, location, service process, and service outcome). CCB responses for different problems are expected to vary with the importance of the problem (Hirschman, 1970; Richins, 1983, 1987). The rates of exit, voice, and loyalty also depend on whether the evidence of a problem is straightforward.
Hirschman (1970) proposes that the tendency of consumers to act at all (i.e., exit or voice) when they experience a performance lapse depends on the relative importance of the problem. The more that the customers' well-being hinges on remedying a particular problem, the more likely they are to act. Similarly, the more important the service feature is to customers (e.g., outcome, price) the more likely they are to act if a problem is encountered with that feature. This leads to Proposition 1.
P1 In aggregate, as the mean importance of a problem increases, the proportion of a service supplier's customers who take action should also increase.
In an era of mature markets and intense competitive pressures, many firms are focusing their efforts on maintaining a loyal customer base. Loyal customers often cost less to service, spend more as their time with the firm lengthens, and provide a good source for new business. Customer dissatisfaction diminishes the base, forces the firm to rely on a more volatile customer mix, and erodes the firm's reputation. This is particularly true in service industries, where customer dissatisfaction is a significant problem (Best & Andreasen, 1976; Fornell, 1992; Singh, 1990) and improved customer loyalty has a substantial impact on profits (Reichheld & Sasser, 1990). For many firms, successfully managing customer dissatisfaction is crucial to their stability and profitable growth and requires a strategy that is far more comprehensive than simple complaint handling.
Emphasizing complaints alone is inadequate. The distinction between complainers and noncomplainers oversimplifies the customer reaction to dissatisfying experiences. Dissatisfaction, according to Hirschman (1970), provokes two active negative responses, voice and exit, which present different opportunities and threats to profits.
Hirschman contends that some customers react to dissatisfaction passively, preferring to remain with the firm. These "loyal" dissatisfied customers choose to remain in the belief that the likelihood of an improvement outweighs the benefit of searching for another supplier. While their choice does not immediately threaten profits, loyal customers' continued dissatisfaction may lead them to voice or exit. Another dissatisfaction response is negative word of mouth (Richins, 1983). Singh (1988) finds that negative word of mouth is only associated with exit. Here, it is not treated as a distinct behaviour in the discussion of dissatisfaction responses.
When customers voice, they give the firm a chance to rectify the problem, and interestingly, if the firm recovers successfully, to increase loyalty and profits (Fornell, 1992). Exit, for any reason, reduces the firm's profits. If customers leave from frustration with the product or service quality, they often compound the loss by persuading others to follow them. If exit and voice are driven by different problem types or customer characteristics, losing exit information means that the firm has an incomplete and possibly distorted view of dissatisfaction. Lacking accurate information, managers cannot determine which problems create the most serious threat to profitability; that is, which problems are more likely to prompt exit, and which voice.
Much of the previous research in understanding consumers' responses to problems has focused on individual determinants (such as attitudes toward complaining). Studies of episode-specific factors have examined the effects of product class, attribution of blame, perceived costs of complaining and the expectations of a successful complaint, as well as respondents' personal characteristics (see Richins, 1987, and Singh & Howell, 1985, for reviews). More recently, Singh (1990, 1991) has examined the role of market structure as a determinant of dissatisfaction responses.
In contrast, this study examines determinants that are rooted in the nature of the problem experienced (i.e., service quality, pricing, and location). The research considers the connection between problem types and customer choices among exit, voice, and loyalty in a service industry. It uses a hypothetical choice problem requiring respondents to state how they would react to a variety of problem combinations. The results provide insights into the relative importance of different problems to customer defection rates.
Theoretical Background
As initially proposed by Hirschman (1970), when customers face a problem, they may respond by exiting (switching to a new supplier), voicing (attempting to remedy the problem by complaining), or loyalty (staying with the supplier anticipating that things will get better). Extensive research has examined the nature and causes of consumer complaint behaviour (CCB), including the empirical significance of exit and voice (Best & Andreasen, 1976), the correlates of exit and voice (Richins, 1987), and customer response categories based on their choice of voicing (Singh, 1988). To date, no empirical work appears to have examined the connection between problem types and exit and voice responses.
This study investigates the connections between types of problems (i.e., performance lapses) and aggregate rates of exit, voice, and loyalty (Figure 1). According to Hirschman (1970), in response to a performance lapse, a fraction (lI--a) of a supplier's customers take no action, and a fraction a either exit immediately or voice. Of those who take action, a fraction cp switches immediately and a fraction (1--p) complain. Of those who complain about a problem, a fraction y will switch if the problem that they complained about is not solved, and a fraction (1y) will stay with the supplier. These connections are illustrated in the tree diagram shown in Figure 1.
The primary reasons why consumers select a particular product or service-relative price, location, and quality-are also the principal causes of dissatisfaction (Anderson, Cox, & Fulcher, 1972; Best & Andreasen, 1976; TARP, 1986). In particular, when customers deal with service firms, the two main reasons for CCB encompasses problems related to service quality: either a failure to deliver the service or a problem with how the service was delivered (Bitner, Booms, & Tetreault, 1990). These two problems, referred to as outcome (the contractual aspects of the service) and process (the customeremployee relationship aspects of the service), have been identified as distinct and separate constructs (Babakus & Boiler, 1992; Carman, 1990; Cronin & Taylor, 1992; Morgan & Piercy, 1992; Parasuraman, Berry, & Zeithaml, 1991). Outcome involves the performance aspects (contractual) of the service and is a consequence of the skills and know-how of the employees (i.e., professional competence), the ability of the organization and its employees to keep their promises, and to solve problems when they arise (Gronroos, 1984; Morgan & Piercy, 1992). It is based in part on consistency-doing what you say you are going to do and doing it every time (Schmalensee, Bernhardt, & Gust, 1985). It is the reliability of the service, and reflects aspects of the service such as accuracy and timeliness. Process is based on customer-employee relationships. It involves the functional or people aspects of the service and is a consequence of the behaviour and customer-oriented, servicemindedness of the employees (Gronroos, 1984). It reflects the tone of the relationship and incorporates empathy and assurance.
This research builds on two ideas concerning customer complaint behaviour to investigate the rates of exit, voice, and loyalty associated with the four types of problem (i.e., price, location, service process, and service outcome). CCB responses for different problems are expected to vary with the importance of the problem (Hirschman, 1970; Richins, 1983, 1987). The rates of exit, voice, and loyalty also depend on whether the evidence of a problem is straightforward.
Hirschman (1970) proposes that the tendency of consumers to act at all (i.e., exit or voice) when they experience a performance lapse depends on the relative importance of the problem. The more that the customers' well-being hinges on remedying a particular problem, the more likely they are to act. Similarly, the more important the service feature is to customers (e.g., outcome, price) the more likely they are to act if a problem is encountered with that feature. This leads to Proposition 1.
P1 In aggregate, as the mean importance of a problem increases, the proportion of a service supplier's customers who take action should also increase.
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